sexta-feira, 23 de outubro de 2015

Lunch with the FT: Ben Bernanke

At the allotted time of 2pm I am sitting at a booth at McCormick & Schmick’s seafood and steak restaurant in Chicago. My mobile phone rings. It is Ben Bernanke’s assistant. It transpires that I am not at the correct location. This is a chain of restaurants. I went to the wrong one.

Fortunately, it takes only five minutes to arrive at the right place. The restaurant is quite empty. Apart from the background music, it is quiet. The decor is heavy and dark.

Bernanke, 61, is waiting for me. He is wearing a plain brown suit and a yellow tie. I have met him often since he became a governor of the US Federal Reserve in 2002. He is always very much the deliberate and precise academic. It was a happy chance that this scholar, known for his work on the Great Depression, was chairman of the central banking system of the US during the biggest financial crisis since the early 1930s. His new book, The Courage to Act , provides a fascinating account of the effort to save the world from another such catastrophe.

I start by asking him how long the book tour will last. “Pretty much the whole month,” he answers. I suggest he will be delighted when it is over. “Absolutely,” he agrees. And what will he be doing afterwards? He reels off an impressive list of academic lectures. Meanwhile, he is based at the Brookings Institution, a centrist think-tank in Washington. He is doing some consulting. He is also on the speaker circuit.

The waitress takes our orders. I choose pan-seared swordfish with fingerling potatoes, onions and Brussels sprouts. He selects grilled halibut with green beans, blue cheese and mashed potatoes. I ask him how long he took to recover after leaving the Fed last year. “About 24 hours,” he says. “Relief is a bit of a strong word but I’m very happy to be a civilian again. I follow closely what’s happening in the economy, what’s happening at the Fed. But I no longer have the responsibility to make those tough calls. That was a burden.”

So, I wonder, does he wish to advise his successors? “No, no. I have a lot of confidence in them and I’m sure that they will make some good calls. But I was involved in that for eight years and that included some very difficult decisions. I’ve more or less exhausted my interest in doing that.”

I ask him how much he was affected by the populist rage against him — governor Rick Perry of Texas even accused Bernanke of treason when the former was seeking the presidential nomination in 2011. “It didn’t affect me much personally,” he replies. “I knew that it was just ‘shooting from the hip’. What did concern me, though, was the possibility that the Fed would come under severe political attack or lose its independence. Personally, I never felt under any threat.”

Bernanke is married with two children. How much did the hostility affect them? He replies that they had their own lives. “But my wife tried to help me decompress and make sure that I had good food to eat and some time off once in a while. And I tried to look after myself physically.”

“One of the Federal Reserve’s key functions is to act quickly and proactively when the legislative process is too slow. And the Federal Reserve was originally set up primarily to address financial panics, not do monetary policy. So it’s part of the job description.I ask him about the hostility to the very idea of a central bank in the US. “Well, it isn’t a unique situation. Switzerland, for example, and a few other countries, have had populist reactions to the crisis. In the United States, we’ve had other episodes: most recently, the Volcker disinflation of the early 1980s. I had in my office a piece of wood, which critics mailed to Paul Volcker [then chairman] saying: cut interest rates.

“All that being said, the hostility concerns me. I tried my best to bring our story to the broader public. I wish I could have done more. Perhaps, in retrospect, I should have done more. But I was very much engaged in trying to put out the fire. So I don’t know what to say. It was kind of predictable. The Federal Reserve failed in the 1930s. I think we did much better than in the 1930s.”

At this stage, we are eating. My swordfish is firm and juicy. Bernanke eats without comment, focusing on answering the questions.

Many critics complain that the Fed saved the rich and the bankers but let ordinary people drown. How does he respond? “Rising inequality’s an important issue for the US,” he says, “but it is a long-term trend that goes back at least to the 1970s. And the notion that the Fed has somehow enriched the rich through increasing asset prices doesn’t really hold up, for a couple of reasons: one is that the Fed basically has returned asset prices and the like back to trend; another is that the reason stock prices are high is because returns are low.

“It’s ironic that the same people who criticise the Fed for helping the rich also criticise the Fed for hurting savers. And those two things are inconsistent. But what’s the alternative? Should the Fed not try to support a recovery?”

He continues, warming to his theme: “If people are unhappy with the effects of low interest rates, they should pressure Congress to do more on the fiscal side, and so have a less unbalanced monetary-fiscal policy mix. This is the fourth or fifth argument against quantitative easing after all the other ones have been proven to be wrong. And this is certainly not an argument for the Fed to do nothing and let unemployment stay at 10 per cent.”

Other critics argue, I note, that the Fed’s intervention prevented the cathartic effects of a proper depression. He teases me by responding that I have a remarkable ability to keep a straight face while recounting what he clearly considers crazy opinions.

I add that many critics still expect hyperinflation any day now. “Well, we were quite confident from the beginning there would be no inflation problem. And, of course, the greater problem has been getting inflation up to target. As for allowing the economy to go into collapse, this is the Andrew Mellon [US Treasury secretary] argument from the 1930s. And I would think that, certainly among mainstream economists, it has no credibility. A Great Depression is not going to promote innovation, growth and prosperity.”

I cannot disagree, since I also consider such arguments mad. Nevertheless, I note, we have to recognise that neither he nor the Fed expected the meltdown. Does the blame for these mistakes lie in pre-crisis monetary policy, particularly the targeting of inflation, with which he is closely associated? Had interest rates not been kept too low for too long in the early 2000s?

“The first part of a response is to ask whether monetary policy was, in fact, a major contributor to the housing bubble and all that happened. Serious studies that look at it don’t find that to be the case. People such as Bob Shiller [a Nobel laureate currently serving as a Sterling professor of economics at Yale University], who has a lot of credibility on this topic, says that: it wasn’t monetary policy at all; it came from a mania, a psychological phenomenon, that took off from the tech boom and moved into housing.”

Thus, lax regulation was to blame. Has the problem been fixed? “I think it’s an ongoing project,” he replies. “You can’t hope to identify all the vulnerabilities in advance. And so anything you can do to make the system more resilient is going to be helpful. I do think, if I had to pick a single change that has moved us in the right direction, it would be the increase in capital in the largest banks, which means they are more likely to withstand whatever the shock may be.”Bernanke continues: “The second general argument is that, while I think the Fed had some complicity, it wasn’t so much in monetary policy but, together with the other regulators, in not constraining the bad mortgage lending and excessive risk-taking that was permeating the system. This, together with the structural vulnerabilities in the funding markets, and so on, led to the panic.”

The late Hyman Minsky, I point out, argued that “stability destabilises”. So did the very notion of a “great moderation” cause the imprudent behaviour?

He replies that “individually rational behaviour can be collectively irrational. And that’s why the regulators have to do what they can to constrain individual behaviour, so that it doesn’t lead to collectively irrational outcomes.”

Some argue that the financial sector is riddled with perverse incentives: limited liability; excessive leverage; “too-big-to-fail” banks; and a range of explicit and implicit guarantees. How far does he agree? “I think that there was, for rational or irrational reasons, an upsurge in risk-taking. And if you’re taking risks, then I have to take the same risks, or else I get left behind.

“There’s two ways to get rid of ‘too-big-to-fail’. One is by having a lot of capital. And the other approach is via the liquidation authority in the Dodd-Frank law [whereby the finances of failing banks can be reorganised, without a bailout].” But, he adds, “if you break the firms down to the size of community banks, you lose a lot of functionality. At the same time, you don’t necessarily stop financial panics, because we had financial panics in the 1930s.”

So how much capital should there be in banks? Some economists — Anat Admati of Stanford University, for example — think it should be 20 per cent of assets or even a third.

“Tim Geithner was very much in favour of more capital,” he responds. “I was certainly in favour of more capital. I think we made a lot of progress. You know, though, that these are international debates and decisions. Other countries were less inclined to add capital. But I wouldn’t do it by an arbitrary number. What I would do is stress test it, because the amount of capital you should hold depends on the kind of assets and the kind of businesses you have. And if it’s a fixed leverage ratio, then you’re going to have every incentive to load up on risk.”

I ask him whether he is confident that the improvement in the resilience of the banks is adequate. “It’s a fool’s game to predict that everything is going to be fine, because either it is fine, in which case nobody remembers your prediction, or something happens, and then . . . ” They remember your prediction, I interject.

Bernanke continues: “My mentor, Dale Jorgenson [of Harvard], used to say — and Larry Summers used to say this, too — that, ‘If you never miss a plane, you’re spending too much time in airports.’ If you absolutely rule out any possibility of any kind of financial crisis, then probably you’re reducing risk too much, in terms of the growth and innovation in the economy.”

The waitress asks us if we would like anything more. I order a double espresso. Bernanke asks for tea. By now, our time is coming to an end. But I push a little harder on the costs of financial liberalisation. He agrees that, in light of the economic performance in the 1950s and 1960s, “I don’t think you could rule out the possibility that a more repressed financial system would give you a better trade-off of safety and dynamism.”

What about the idea that if the central banks are going to expand their balance sheets so much, it would be more effective just to hand the money directly over to the people rather than operate via asset markets?

Having gained the nickname “Helicopter Ben” for suggesting just such a policy, he is very much aware of this idea. But he responds by saying, “Well, it doesn’t have to be put in such an off-putting form. I think a combination of tax cuts and quantitative easing is very close to being the same thing.” This is theoretically correct, provided the QE is deemed permanent.

While paying the bill I ask whether, given the weight he places on regulation, he believes it is really possible to regulate today’s complex global megabanks. “Yes,” he responds. “The Federal Reserve moved recently in the direction of enhancing its oversight of foreign subsidiaries and foreign banks that are located in the United States. So there is some movement towards so-called national treatment.

“Banks complain that that’s going to Balkanise the capital markets. But, as Mervyn King [former governor of the Bank of England] said so beautifully, banks live globally and die locally. So, for that reason if no other, there’s some case for having regulators look at the subsidiaries of foreign firms, as well as their own domestic firms.”

I add that it was only because of Lehman’s failure that they finally got the needed bailout authority from Congress (via the “Tarp” or Troubled Asset Relief Program). “Ultimately, something was going to go,” he agrees.I turn, finally, to perhaps the biggest question about the crisis. Could they have avoided the failure of Lehman in September 2008? “No,” he responds firmly. “It was completely unavoidable. Without a buyer, there was no one to guarantee their liabilities. So no one would lend to them. There was a complete run of all the creditors, all of the counterparties, all of the customers. And if we had lent them the money and somehow conjured up some fake collateral, in violation of the law, we would have ended up owning the firm, and it would have been a non-viable firm.”

Under Bernanke’s chairmanship, the Fed, whatever its pre-crisis mistakes, helped save the US and the world from a disaster. Humanity should be grateful, I thought on leaving. Humanity, being human, mostly is not.